EconMatters: American Companies Most At Risk to Lose Big with Brexit

Wednesday, June 22, 2016

American Companies Most At Risk to Lose Big with Brexit

We�re down to the wire. Tomorrow�s the day the U.K. decides on whether or not to stay in the European Union.

If Britain decides to exit, British and European markets are going to sell off hard � that�s a given. And that could be just the beginning of trouble across the pond.

And make no mistake � the implications of a Brexit are going to be global. That means American stocks won�t be far behind. In fact, some could tumble end-over-end.

That�s because lots of big American multinationals generate tons of revenue from British and European operations, and sell huge quantities of goods and services there.

Here�s how earnings will be affected by a Brexit � and which stocks are most vulnerable�

The �Gateway� to Europe

Great Britain generates billions of dollars of revenues for American multinationals.

According to a recent Bank of America research piece by Joseph Quinlan, Managing Director and Chief Market Strategist at BoA�s U.S. Trust Private Wealth Management unit, since 2000, U.S. multinationals have generated 9% of their global foreign affiliates� profits from the U.K.

Output of U.S. affiliates in the U.K. was $153 billion in 2013 alone.

U.S. corporations invested $588 billion in the U.K. in 2014. That�s double what they invested in South America, the Middle East and Africa combined, says Quinlan.

Besides Britain being a destination for investment and American companies� goods and services, it�s also a gateway to the rest of Europe for America�s biggest companies.

John Manley, chief equity strategist at Wells Fargo Funds Management, says American firms, �use Britain as sort of the shoehorn into the continent.�

That makes sense because of the ties so many multinationals have had to Great Britain since long before the European Union came into being.

The E.U. is the world�s largest trading bloc, responsible for 16.9% of global GDP, based on purchasing power parity (PPP). The U.S., if it were considered to be a bloc, would be second to the E.U., generating 15.8% of the world�s GDP, according to the IMF.

So the ties between Great Britain, the European Union, and the U.S. are very important.

But those ties could be severely stressed, in terms of market reaction, in the event of a Brexit from the E.U.

Interconnected business relationships will be exposed to potentially devastating credit market gyrations and what George Soros says could end up being a 20% devaluation of the pound sterling. Over the past year, the pound is down 10% against the dollar, with 5% of that drop coming since January 2016.

A further depreciating pound would have immediate knock-on effects on the euro, possibly knocking it down 10% or more.

These currency hits put U.S. multinationals in the direct line of fire.

Companies generating revenue in the U.K. and across the E.U. would suffer huge earnings hits if they have to translate their overseas earnings and profits back into U.S. dollars, which ends up costing them dearly when it takes billions more devalued pounds and euros to buy what would be relatively more expensive U.S. dollars.

With S&P 500 earnings approaching three-year lows, even as markets near record highs, any hard and fast further erosion of earnings for the remainder of 2016 and beyond would require a massive revaluation of stock prices based on most standard earnings multiple metrics.

American Companies With the Most to Lose

Some of America�s biggest companies have huge exposure to the U.K. and Europe.

JPMorgan Chase & Co. (NYSE:JPM) employs 16000 people in the U.K. and generates substantial revenues from banking services and deal-making in the U.K. and across the E.U.

Ford Motor Co. (NYSE:F) employs 14,000 people in Britain and gets 18% of its revenue from the U.K. It is the number one auto brand there.

The Coca-Cola Co. (NYSE:KO), Abercrombie & Fitch Co. (NYSE:ANF), The Gap Inc.(NYSE:GPS), Invesco Ltd. (NYSE:IVZ), and Wal-Mart Stores Inc. (NYSE:WMT) all derive huge revenues and profits form the U.K. and countries all across the E.U.

The list of U.S. companies doing billions of dollars each in the U.K. and across the E.U. includes more than half of all the S&P 500 companies.

So, a Brexit would be devastating, not only for those companies revenues and profits, but because so many of them are such a big part of America�s big stock market benchmark indexes, U.S. markets would likely follow U.K. and European equity markets down the tubes.

It�s almost upon us. If you haven�t taken out some insurance against falling markets, it�s not too late�

By Friday morning, it might be.

Courtesy Shah Gilani at Wall Street Insights & Indictments (EconMatters author archive here)